French writer and philosopher, Voltaire once said “the human brain is a complex organ with the wonderful power of enabling man to find reasons for continuing to believe whatever it is that he wants to believe.”
It’s not hard to apply that quote to investing, especially when our minds find all manner of ways to delude ourselves and continue repeating self-defeating behaviour.
Until we recognize and accept our biases, we’re likely to continue making mistakes that cost us money.
Here are some common biases and excuses that you may have heard or told yourself.
1. I’m waiting for more certainty. There’s been a lot of waiting going on throughout 2012 and 2013, investors have been telling us about it because they wanted to wait to be sure it was safe to invest.
In the meantime, the total return of the ASX All Ords Accumulation Index was 42.2%, the total return of the MSCI World Index was 68.13% and the total return of listed property was 42.45%.
2. I knew this was going to happen! The same investors waiting for more certainty also had an expectation the markets would crash.
When the markets went down in mid-2012 and mid-2013, they felt vindicated, but then the markets recovered to post those returns noted in number 1.
3. No one saw this coming! The flipside of number 2 – when an investor believes in an investment so much they actually believe they’ve been blindsided when something goes wrong.
No amount investment research ever unmasks those external events that do the most damage.
4. I was wrong, but I don’t want to sell at a loss! While a managed fund or index has hundreds of companies able to drive it back up and pay dividends, one falling share becomes a riskier proposition.
Holding onto that one loser may mean missing other opportunities, while continuing to hinder the fundamentals of your portfolio.
It doesn’t take a philosopher to know that unless we confront our investment biases and stop rationalising away our mistakes, they will seriously eat away at our returns.
Peter Mancell is a director of Mancell Financial Group and FYG Planners AFSL/ACL 224543, www.mfg.com.au This information is general in nature and readers should seek professional advice specific to their circumstances. Looking to reach your goals with one of Australia’s highly rated financial advisors?
